Why is Jerry Brown Downplaying California’s Recovery?

On Thursday morning, as New Jersey’s Governor, Chris Christie, tried to persuade reporters that he hadn’t engineered a traffic jam for political purposes, California’s Governor, Jerry Brown, met with reporters to address a much more pleasant communications-department crisis.

Someone had leaked Brown’s new budget plan ahead of schedule. As Christie rambled toward the end of his comments, Brown explained to his own press corps, a day earlier than planned, that, yes, the leak was accurate. The state government really is about to bring in more revenue than ever before.

“Resigned to the fact that Brown’s CA budget roll out is not the most high-profile gubernatorial presser out there today,” Scott Detrow, a Sacramento public-radio reporter, tweeted minutes before Brown showed up. Once the governor arrived, he didn’t do much to raise the event’s profile. Rather than offering triumphant aphorisms about California’s comeback, or even a sly riff on Christie’s simultaneous appearance, the Governor only briefly mentioned the “good news.” He then spent much of the press conference warning people—quite humorlessly, really—that they had better not get too excited about it.

I moved to California in the fall of 2000, at the height of the first dot-com boom, to start my freshman year at Stanford. I learned to use Google; I decided to major in computer science. That fall, Pets.com shut down, which turned out to be a harbinger of the coming bust. But that, too, didn’t last. By the time I graduated (with an international-relations degree, instead; I’d changed my mind), my friends and I were using Facebook to stay in touch, Google was about to go public, and companies were taking seniors out to recruitment dinners at the fanciest restaurants in Palo Alto. In the span of four years, I’d watched California boom, bust, and start to boom again.

“What goes up just as sharply goes down,” Brown said in his press conference. This might sound like a meaningless cliché, but it expresses an important point about California. A lot of super-rich people live in the state—more than a fifth of the Forbes 400 list—and they make much of their money from investments in stocks and real estate. What’s more, California has a progressive tax structure that relies heavily on these people’s capital gains. This means that the state’s fortunes fluctuate wildly with the stock market. A graph charting capital-gains changes in California looks roughly like the alarming display of a heart-rate monitor at the hospital.

That’s probably what Brown had in mind when he placed precisely that chart on the second page of his budget proposal. It was labelled, in case the visuals didn’t get the point across, “Capital Gains are Extremely Volatile.” For the fiscal year that starts in July, Brown anticipates a hundred and six billion dollars in revenue, up from eighty-three billion in 2009. That’s more than a billion dollars higher than the state had earlier estimated; the change has mostly to do with capital gains, Brown said; stocks and real-estate prices are climbing.

As his budget plan explains, those gains confound planning efforts by “bulleting upwards only to crash dramatically shortly thereafter.” Capital gains are expected to bring in more than ten billion dollars over the coming fiscal year—about ten per cent of total tax revenue in the general fund. In the fiscal year that started in July, 2009, that figure was less than four per cent.

Brown has political reasons to downplay the fiscal recovery: he’s trying to make the case that much of the new funds should be used to pay off debt and make the state’s first deposit since 2007 into its rainy-day fund. To persuade legislators, he first has to convince them that the new revenue won’t last forever, and so shouldn’t be poured into new programs that would just have to be cut later, once this boom ends.

I wrote in August about the California Comeback Myth: the idea, which seems to come around every time California starts doing well again, that what goes up must go up forevermore. At the time, Brown was getting a lot of credit for repairing the state’s finances. (Joel Stein, of Bloomberg Businessweek, recently wrote that “Brown killed California’s deficit, awakened its economy, and provided hope that the U.S.’s biggest state can be great again.”) I suggested that another crisis was surely due—if not immediately, then eventually. On Thursday, aided by pages of doomsdayist writing and a bunch of scare charts, Brown himself made that case more bluntly than anyone. As he knows, California’s finances are a lot like the Presidential prospects of governors: things can climb steadily and then collapse all at once.

Photograph: Ken James/Bloomberg via Getty

Vauhini Vara, the former business editor of newyorker.com, lives in San Francisco and is a business and technology correspondent for the site.